Tuesday, August 17, 2010

Coke, Pepsi, and Zynga (and Margins)

Zynga is now the third most valuable gaming company in the world, with a valuation of $4.66B according to SharesPost. This ranks just behind Electronic Arts and its valuation of $5.36B. The market leader is of course Activision Blizzard, coming in at $13.44B. Zynga has already lapped Nintendo ($3.16B), ye olde company that conjures up more warm game memories than perhaps any other. How long before Zynga laps EA? How long before the maker of FarmVille and Mafia Wars becomes more valuable on the open market than the maker of Madden and the Sims? How is it even possible? Margins. Which have been estimated at 30%.

Look at the financials of EA and Activision. I'm seeing razor thin margins for both. Keep in mind too that both companies pull in ~$4B of revenue annually, an estimated six to seven times what Zynga pulls in.

Of course, it's not all about margins. The long bet is that Zynga will continue to grow its top line. But the margins, the free cash flow - investors notice. They notice that FarmVille didn't take $100M to make like WoW, or many years and >$100M to make like Star Wars: The Old Republic. Zynga's games are lean, the rewards vast, and the margins high. Trust me - investors notice. To wrongfully paraphrase Obi-Wan, "these are margins you are looking for."

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